Why the Financial Crisis will Hurt China Hard

This post is a useful round-up of why China is going to go through some very painful adjustment costs in the next couple of years. This emphasises points previously raised in this blog.

Global financial crisis will hurt China much more than the US [CNreviews]

China’s economic growth is supported by three primary legs:

1. export-led growth
2. real property growth
3. government spending

The first leg is clearly broken. US and European consumers can no longer consume at the debt-supported levels they have at the past. The second leg is also broken, in part because of the first. Rising unemployment, declining Chinese consumer confidence, and significant price declines in real property have slowed sales. So what is left is government spending. Government plays a more significant role in the Chinese economy than Western economies, but can increased government spending make up for the other legs of the stool?

The consensus among economists is “no.” And even more worrying, is the belief that Chinese government policy response could make the global financial crisis worse.

The article then links to a number of other points that back up the "China is in toruble argument".

The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Now Stalling [RGE monitor]

More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling. Let us consider now in detail the evidence that China may be on its way to a hard landing…

Rising unemployment increases the pressure for misguided trade policies [China Financial Markets]

The first is that the unemployment situation here has gotten grim enough that the government is trying to mediate labor and pay disputes and to make it harder for companies to lay off workers. They are especially worried about the implications for social unrest. According to a Bloomberg piece today:

A survey of 84 cities showed demand for workers fell 5.5 percent in the third quarter, the first decline in years, Vice Minister for human resources Zhang Xiaojian said at the press conference today. The ministry should be able to keep the urban unemployment rate within the government’s target of 4.5 percent this year, although the rate will “worsen” next year, Zhang said. That figure does not include an estimated 200 million migrant workers who have left their home town in the countryside to work in cities. Even before the current global crisis, the country faced a huge gap between 24 million new job seekers and the 12 million jobs created annually, according to the ministry.

Most people believe that the official urban employment rate significantly understates real urban unemployment, and although I have hear that real unemployment is as high as 10-11%, I have seen nothing very credible on the issue. I assume unemployment is higher but I don’t really know what it is.

The writer of the original article concludes with 5 points. I agree with all 5 points although I suspect the exchange rate will continue to appreciate slowly against other currencies. The stockmarket will continue to fall and unemployment will rise. Housing prices will also fall and by more than is expected.

Here’s my conclusions:

1 China’s equity markets could fall further. Many listed companies are dependent on real property or export markets.
2 China’s property markets could fall further. Not only are private individuals freezing up, but the government is also making significant investments in public housing. That might have some effect on price levels for private housing. To early to buy.
3 RMB will neither appreciate or depreciate. It will likely hold the dollar peg at the current level, for quite some time.
4 China’s labor markets will get more attractive to employers, but less attractive for employees and job seekers. There will be a large number of unemployed new graduates. There is risk of social unrest.
5 Freedom of speech and media will likely be curtailed further in the future as the risk of social unrest increases.

In summary, the world doesn’t look as wonderful as it once did.

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